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Housing Market Bolsters Home Depot Spinoff HD Supply

When HD Supply went public over the summer, the thinking was
that its stock would get a lift from a recovering housing
market.

That has been true to a point, though the construction and
industrial products supplier has run into more head winds than it
likely banked on before its June initial public offering.

HD Supply (
HDS
), a former unit ofHome Depot (
HD
) that was sold to private equity firms in August 2007, bills
itself as one of the largest industrial distributors in North
America. It has around 500,000 customers and $9 billion in annual
sales.

The breadth of HD Supply's products puts it into a number of
construction and industrial markets, not just residential.

Still, the company concedes in filings with the Securities
& Exchange Commission that most of its business units "are
dependent to varying degrees upon the new residential
construction market."

That market has seen a nice rebound over the last year amid
rising home sales and prices. This is one of the reasons HD
Supply went public over the summer. The company opened at a price
of $18 on its first trading day June 27.

While the stock has moved higher since then -- it currently
trades near 24 -- there have been ups and downs along the way as
the housing market recovery has been slowed by rising mortgage
interest rates and some ongoing economic uncertainty.

HD Supply CEO Joseph DeAngelo addressed some of the housing
market concerns on a fiscal third-quarter conference call last
month, saying that "for the residential markets, the strength
that we saw earlier in the year moderated."

He also said growth in single-family housing starts came in
lower than expected during the quarter, which ended in
October.

Those issues aside, housing end markets were still strong
enough in the quarter to help HD Supply put up decent
numbers.

Earnings came in at 38 cents a share, topping analyst
consensus estimates for 35 cents. Sales rose 7% to $2.3 billion,
matching views. The gross profit margin widened to 29.1% from
28.7% a year earlier.

HD Supply posted top-line gains across all of its business
units. Its Facilities Maintenance unit, which provides products
and services to the multifamily housing market, logged 8% organic
sales growth during the quarter.

The Waterworks business, which supplies water and wastewater
products, delivered 11% organic sales growth. The White Cap
business, which provides specialty construction and safety
supplies to professional contractors, also had 11% organic sales
growth.

Power Lacks A Punch

Lagging those units was HD Supply's Power Solutions division,
which provides services to power companies, utilities,
construction firms and industrial clients. It had organic sales
growth of just 1% during the quarter.

"This is one of the more growth-constrained businesses due to
a concentration of both large customers and suppliers," he said,
"and is HD Supply's most direct overlap" with rivalWesco
International (
WCC
).

For fiscal 2014, HD Supply guided midteens growth in
residential end markets, modest growth in nonresidential markets,
and a flat-to-down performance in the infrastructure businesses,
largely due to sluggish municipal water and utility capital
spending.

"Because of this compounding dynamic, we continue to view HD
Supply as more of a revenue story than a margin story," he
added.

Most analysts reckon that HD Supply will post mid- to
high-single-digit revenue growth in coming years. Over the near
term, it should get a leg up from residential construction as
growing demand for homes outweighs the rise in mortgage
rates.

In a report last month, the Commerce Department said housing
starts in November rose 22.7% from October to an annualized rate
of 1.09 million. That topped economist forecasts and represented
the highest level since February 2008.

Permits for future projects were near a five-year high,
indicating that the momentum will continue this year. December
data are due out on Jan. 17.

Commercial Construction

The prognosis for nonresidential markets is less optimistic,
though some analysts figure that HD Supply can still find growth
in these sectors by beating rivals for new business.

"Despite some uncertain end markets and recovery timing issues
in nonresidential construction, utilities and power markets, we
remain positive on HD Supply's ability to gain market share in
its highly fragmented industrial distribution end markets,"
Citigroup's Dray said.

Analysts polled by Thomson Reuters expect HD Supply to post
earnings of 54 cents a share for fiscal 2013 . The company's
annual profit is seen rising to $1.35 a share in fiscal 2014 and
$2.16 in 2015.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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